The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Moody’s has warned that a working age population due to “plateau” by the mid-2020s will limit The Bahamas’ economic growth potential and “weigh” down its sovereign credit rating.

The international credit rating agency, in its just-released latest update on The Bahamas, said the government’s post-Dorian interest (debt servicing) burden at 15 percent of its total revenues will be more than double that of countries with the same “Baa3” credit rating.

It added that the government’s deficit forecasts for the upcoming six fiscal years were similar to its own, with the Fiscal Responsibility Act’s target 0.5 percent deficit target as a percentage of gross domestic product (GDP) only achieved in 2024-2025.

More intriguing, though, is Moody’s forecast that an increasingly elderly population will start to impose a growing burden on working age Bahamians to support them and help finance their retirement needs.

“Social considerations, in particular demographic trends, affect The Bahamas,” the rating agency said. “Growth in the working age population has been slowing since the late-2000s, and the number of working-age people is likely to plateau by the mid-2020s. This will limit economic growth, weighing on The Bahamas’ credit profile.”

Larry Gibson, vice-president of Colonial Pension Services (Bahamas), yesterday told Tribune Business he was “somewhat surprised” that Moody’s was predicting that working age population growth in The Bahamas was set to fall away as early as the mid-2020s.

He acknowledged, though, that this will eventually become a “massive issue” for The Bahamas as it has in many European and developed countries. And the National Insurance Board (NIB) could already be experiencing some of the trends outlined by Moody’s. Its contribution income has been exceeded for several years now by benefits payouts, which could be one sign of a growing elderly population.

“I know NIB has crossed the threshold some time ago where payouts were greater than contributions and income,” Mr Gibson said. “But I’m kind or surprised because The Bahamas has always had a large population of young people. I don’t think we would be there yet. If that’s the case, I question some of our statistics.

“I didn’t think it would have climbed so soon. At some point it will be a massive issue, but I’m kind of surprised that it’s happening now.”

Moody’s, meanwhile, agreed that The Bahamas’ debt-to-GDP ratio is set to imminently jump to 66 percent due to $1.7bn in collective deficit spending over the next four fiscal years as the government grapples with Dorian’s reconstruction costs.

“Given that the reconstruction efforts are likely to begin in earnest in 2020, we expect the deficit to widen in second half of the fiscal year,” Moody’s said. “The authorities’ deficit forecast for fiscal year 2019-2020 is 5.3 percent of GDP, followed by a reduction to 3.8 percent in 202-2021 and 2.2 percent in 2021-2022, and down to the fiscal rule’s medium-term target of 0.5 percent of GDP by 2024-2025.

“Our updated fiscal forecasts follow a similar trajectory as the official ones, which would contribute to an increase in the debt burden over the coming years toward 66 percent of GDP. At this higher level, The Bahamas’ debt burden is broadly aligned with the median for ‘Baa3’-rated sovereigns. However, given the loss in revenue, its interest burden will be higher at 15 percent compared to the median of 6.4 percent.”

Dorian’s impact on the country’s short and medium-term finances, which has placed fiscal consolidation firmly on the backburner for the time being, shows that a 2019-2020 deficit equivalent to 5.3 percent of gross domestic product (GDP) or $677.5m will drive the Government’s direct debt beyond the $8.205bn mark by end-June 2020.

The direct debt-to-GDP ratio will increase by more than seven percentage points compared to initial projections, rising from 57.3 percent to 64.4 percent by the time this fiscal year closes. This ratio is forecast to peak at 66.6 percent at the end of the 2020-2021 fiscal year, and will only have come down slightly to 65.9 percent some two years later.

The Government’s revised budgetary projections show more than $1.7bn being added to its direct debt over the four years from end-June 2019 to the close of the 2022-2023 fiscal year, taking it to $9.243bn. As for debt servicing, these costs are set to soar to almost $400m by the 2022-2023 fiscal year.

Still, despite the increased “red ink”, Moody’s gave no indication it plans to cut The Bahamas’ sovereign creditworthiness - a move that would see this nation fall from investment grade to so-called “junk” status. It projected that this nation’s economic growth will be flat in 2020, with Dorian having cut last year’s expansion to just 0.6 percent.

“We estimate that the economy expanded 0.6 percent in 2019, the result of moderate growth in the first eight months of the year being partly offset by the effects of Hurricane Dorian,” Moody’s said. “We expect real GDP to remain flat in 2020, although the outlook remains uncertain because there is limited post-hurricane data available so far.

“No data on tourism is available for 2020, but figures for the 2019 fourth quarter showed tourism rebounding from the effects of Dorian. If tourism remains steady, there should be limited negative spillover effects on associated sectors, chiefly transport and retail.

“We expect a recovery in the second half of 2020, driven by private and public reconstruction efforts. Major considerations on these processes will be the awarding of construction permits and the availability of labour, materials and financing. The Government has already acted to address some of these challenges, temporarily suspending statutory fiscal targets and announcing tax waivers for reconstruction expenses.”

Turning to the Government’s fiscal position, Moody’s added: “The central government’s fiscal deficit in the first half of fiscal year 2019-2020 was $189m, a slight increase from the previous year’s $174m.

“The deterioration was driven by the expenditure related to relief efforts following Dorian, as total revenue actually registered a 9.1 percent year-on-year increase, despite lower collections in Abaco and Grand Bahama, the affected islands. In year-on-year terms, expenditures rose by $106m (8.9 percent), with direct hurricane-related expenditure accounting for $50m.”

Looking to the future, Moody’s added: “Notwithstanding the deterioration in the Government’s debt metrics, authorities had made important progress in implementing the new fiscal policy framework, increasing transparency and complying with the new fiscal rules through fiscal 2018-2019.

“Given the magnitude of the economic and fiscal shock caused by Hurricane Dorian, a key factor that will support The Bahamas’ credit profile will be the Government’s ongoing efforts to strengthen the fiscal policy framework, as well as any measures that would support the consolidation process in future years amid a gradual economic recovery.

“Important policy initiatives involve reforms to public financial and debt management and the reform of state-owned enterprises (SOEs). The latter will be key for deficit-reduction efforts, given the ongoing budgetary support provided by the central government.”